Indian Oil and Gas Canada Annual Report 2006-2007

Indian Oil and Gas Canada

2006-2007 Annual Report Mandate: To fulfill the Crown’s fiduciary and statutory obligations related to the management of oil and gas resources on First Nations lands and to further First Nation initiatives to manage and control their oil and gas resources.

Mission: To work together with First Nations to manage their

Published under the authority of the oil and gas resources. Minister of Indian Affairs and Northern Development and Federal Interlocutor for Métis and Non- Status Indians Ottawa, 2007 www.ainc-inac.gc.ca 1-800-567-9604 TTY only 1-866-553-0554

QS-9003-012-EE-A1 Catalogue No. R1-5/2007E-PDF ISBN 978-0-662-46705-2

© Minister of Public Works and Government Services Canada

Cette publication est aussi disponible en français sous le titre : Pétrole et gaz des Indiens du Canada Rapport annuel 2006 - 2007

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Table of Contents

Mandate Key Initiatives Operations Mission 5 First Nations Oil and Gas 14 Executive Division Overview of IOGC 6 Modernization of the IOGA 15 Land Division 7 Royalty with Certainty 19 Production Division 1 CEO’s Message 8 Streamlining the Royalty Process 23 Planning and Corporate Services 3 Corporate Evolution 9 Automation of Interest 3 Statutory Authorities Financial Operations 4 Co-Management Board Spotlight 4 Indian Resource Council 10 Band-Owned Companies 11 Map of WCSB 12 Map of Canada CEO’s Message

Gregg C. Smith Chief Executive Officer and Executive Director

It is my pleasure to report that fiscal year 2006- However, the increased moneys collected by IOGC 2007 was another very active year for Indian Oil in these areas were more than offset by the and Gas Canada (IOGC). With overall unabated decreased gas royalties collected on behalf of First industry activity and continuing internal change Nations. Fiscal year 2006-2007 saw a 40% drop in through IOGC's key initiatives, combined with fixed the gas royalties collected on behalf of First Nations: resources at best, the year demanded focus on the in 2005-2006 they totalled $223.4 million, and in highest priorities. 2006-2007 they totalled $133 million. The large drop is mainly attributable to significantly lower gas Industry activity remained high as it has for the past prices and production. The result is that total moneys several years. The number of wells drilled on Indian collected by IOGC on behalf of First Nations in interest lands was 200, the highest level in three 2006-2007 were $189.5 million, a 30% drop from years. Compensation and rental moneys collected the $271.5 million collected in the previous fiscal by IOGC on behalf of First Nations continued to year. grow, with $14.3 million collected in 2006-2007, $1.6 million more than the previous year. Oil The overall high level of industry activity over the production from First Nation reserve lands and oil past few years has resulted in an increasingly tight royalties collected on behalf of First Nations were labour market that has affected virtually every both higher than the previous year, with oil royalties organization in Alberta, Calgary-based IOGC being increasing $7.0 million to $33.4 million in 2006- no exception. Turnover and staffing of several hot 2007. industry job areas in particular continue to be

Indian Oil and Gas Canada2006-2007 Annual Report | 1 problematic. As a result of growing human IOGC, in partnership with the Indian Resource resource issues, IOGC commissioned a study on Council (IRC), was able to resume work on the key recruitment and retention that was completed in initiative, the modernization of the Indian Oil and May 2006. The study resulted in a number of Gas Act and Regulations. A significant amount of recommendations, some of which have already work was performed on this key initiative several been implemented. IOGC hopes to see its work on years ago, but IOGC and Indian and Northern recruitment and retention bear fruit in the near Affairs Canada suspended their work in 2003-2004 future. In the meantime, IOGC is continuing its to focus departmental resources on the development work on succession planning, as demographics of both FNOGMMA and the First Nations indicate that future retirements will pose additional Commercial and Industrial Development Act.In challenges. order to retain momentum during that time, the IRC prepared a proposal detailing further changes that IOGC also continued work on several multi-year went beyond the scope of the modernization. key initiatives that are improving its business Resolutions passed at subsequent IOGC Co- processes and benefiting oil and gas First Nations Management Board and IRC Annual General and companies. Progress made on IOGC's key Meetings directed the IRC to take steps toward First initiatives are included in the ensuing pages. Nations control, effectively to work toward establishing an institution(s) that could fully address Progress was also made in supporting the future the proposal. Committees were established to guide vision of First Nation control of oil and gas. This the processes, and they met several times during the vision has two parts: individual First Nation control year. and collective First Nation institutional control. Supporting the vision for individual First Nation Finally, the demands of the previous few years have control of oil and gas was the April 1, 2006 necessitated the development of a new overarching coming into force of the First Nations Oil and Gas initiative. Discussion was begun and management and Moneys Management Act (FNOGMMA), which agreed to introduce Phoenix in 2007-2008. Phoenix allows First Nations to assume control and is intended to help IOGC management ensure management of their oil and gas resources and integration across the organization while progressing monies derived therefrom if their community on the key initiatives and executing operational members so choose. IOGC is working towards duties. It will also help set clear priorities and implementation of FNOGMMA, as the three maintain better focus on those priorities. participating First Nations are preparing for community ratification votes. During the fiscal year, I also want to take a moment to honour the the First Nations Oil and Gas and Moneys continuing social responsibility exercised by IOGC Management Voting Regulations were passed, and employees. IOGC's 2006 United Way/Health progress was made on development of the Partners fundraising campaign earned more than FNOGMMA environmental regulations. $7000, and IOGC staff provided Christmas support to four seniors from the Kerby Centre in its Adopt-a- Much of the support for the vision of collective First Family program. Nation institutional control of oil and gas is coming from the Indian Resource Council (IRC). The IRC I'd like to close by personally thanking all IOGC staff has a multi-avenued approach, including leading for their efforts during these challenging times. changes to theIndian Oil and Gas Act and Regulations, supporting a continuous legislative/regulatory change process, creating an Energy Business Centre for Excellence and establishing a collective First Nations institution.

Gregg C. Smith Chief Executive Officer and Executive Director 2 | Indian Oil and Gas Canada2006-2007 Annual Report Corporate Evolution

The Government of Canada has a broad mandate relating to Indian and Inuit Affairs and Northern Affairs which is derived largely from existing legislation and legal obligations arising from section 91(24) of theConstitution Act , 1867. The Department of Indian Affairs and Northern Development is In 1993 Indian Oil and entrusted with fulfilling various legal obligations of the federal Gas Canada was government to Aboriginal peoples as outlined in Treaties, the Indian Act and other legislation. Included in this obligation is the affirmed as a Special management of natural resources on Indian lands, including oil Operating Agency to and gas. increase its flexibility Oil and gas development on First Nation reserve lands has and responsiveness to been regulated since 1916 under theIndian Act . In 1974, due to the sharp increase in oil and gas activities on First Nation both industry and First lands, theIndian Oil and Gas Act was passed, followed in 1977 Nation needs. by theIndian Oil and Gas Regulations . In 1987, Indian Oil and Gas Canada was established, replacing Indian Minerals West, as a dedicated branch within the Department of Indian Affairs and Northern Development to manage oil and gas development and to further First Nation initiatives to manage and control their resources. In 1993 Indian Oil and Gas Canada was affirmed as a Special Operating Agency to increase its flexibility and responsiveness to both industry and First Nation needs.

Statutory Authorities

IOGC operates in accordance with provisions of the: 7 Indian Oil and Gas Act 7 Indian Oil and Gas Regulations, 1995

IOGC also operates in accordance with associated federal legislation including provisions of: 7 The Indian Act 7 The Canadian Environmental Assessment Act 7 Other relevant legislation

Indian Oil and Gas Canada2006-2007 Annual Report | 3 IOGC Co-Management Board

Indian Oil and Gas Canada (IOGC) operates There are nine members on the Board, six of whom under the direction of a Chief Executive are appointed by the IRC and three by the Crown. Officer/Executive Director who participates as a Two Board members serve as co-chairs, the member of the Board of Directors. The Board was Chairman of the IRC and the Assistant Deputy established in 1996 by the signing of a Minister, Lands and Trust Services, Indian and Memorandum of Understanding (MOU) between Northern Affairs Canada. At the end of the fiscal the Minister of Indian Affairs and the Indian year, the co-chairs were Councillor Ben Ground of Resource Council (IRC) to co-manage IOGC the Enoch Cree Nation in Alberta, Chairman of the operations. The Board focuses on areas of IRC and Ms. Caroline Davis, the Assistant Deputy collective interest such as IOGC issues, policies, Minister. plans, priorities and resources.

Indian Resource Council

A representative voice for over 130 First Nations The work of the IRC is guided by basic principles of: with oil and gas interests, the Indian Resource Council (IRC) works with and provides assistance to 7 Supporting member First Nations in their First Nation governments, businesses and efforts to attain full management and control individuals hoping to take advantage of business of their oil and gas resources and employment opportunities within the oil and 7 Ensuring the preservation of federal gas industry. responsibilities established under Treaties with First Nations In 1987, when the IRC came into being, it existed 7 Coordinating the promotion of initiatives first and foremost to watch over Indian Oil and Gas with the federal and provincial governments, Canada. During the ensuing years, this has industry and other groups to enhance changed. The mandate broadened and the IRC economic benefits realized by First Nations realized it could have greater impact, that it could from resource development. fill other niches. The IRC was given responsibility to 7 Encouraging greater development and begin finding ways and means to build capacity in utilization of First Nations human resources terms of First Nation governments and business entities so they would have the knowledge The IRC is headed by President/CEO Mr. Roy Fox necessary to carry on managing the regulatory and reporting to a Board of Directors. The IRC Board business end of oil and gas. Ultimately the IRC consists of First Nation elected leaders from Alberta, helps bridge the way to opportunity for First Nations British Columbia, Ontario, Saskatchewan and New and their people for greater economic self-reliance Brunswick. The current chairman is Councillor Ben through increased management of resources on Ground of the Enoch Cree Nation in Alberta. reserve and traditional lands. The IRC is involved in the development and implementation of For more information, visit the IRC's Web site at employment and training programs and the www.IndianResourceCouncil.ca (available only in creation of alliances between First Nations and the English). oil and gas sector.

4 | Indian Oil and Gas Canada2006-2007 Annual Report Key Initiative First Nations Oil and Gas Management

Background Status

The First Nations Oil and Gas and Moneys FNOGMMA, which received royal assent on Management Initiative, also known as the Pilot November 25, 2005, came into force on April 1, Project, was launched in 1994 with the aim of 2006. During fiscal year 2006-2007, the First enabling several interested First Nations to assume Nations Oil and Gas and Moneys Management control and management of their oil and gas Voting Regulationswere issued. Additionally, the First resources. Over the past decade, the Blood Tribe, Nations Oil and Gas Environmental Assessment Siksika Nation and White Bear First Nation have Regulations were drafted and were scheduled for a each worked closely with IOGC to develop their 30-day pre-publication period in the Canada capacity in order to assume the control and Gazette in the spring of 2007. Pre-publication is management of their oil and gas resources. standard for proposed regulations and gives the public an opportunity to express its concerns. During capacity development, key findings and complex issues which arose indicated that if the The three pilot First Nations intend to hold their complete transfer of oil and gas resource FNOGMMA ratification votes in fiscal year 2007- management to First Nations was to be successful, 2008. If their membership votes in favour of opting new enabling legislation would be needed. The into FNOGMMA, these First Nations should take full three First Nations have been full participants in the management and control of their oil and gas design of the two-part optional legislation, the First beginning the following year. Nations Oil and Gas and Moneys Management Act (FNOGMMA). IOGC is in the process of developing entrance criteria and a FNOGMMA implementation policy, The first part of FNOGMMA enables a First Nation which will allow other qualified First Nations to opt to assume the management and control of oil and into the legislation. gas exploration and development currently carried out on its behalf by IOGC, plus control of the future moneys generated by the oil and gas. The second part enables a First Nation to receive and manage all moneys that are held or that otherwise would be held on its behalf by Canada in its Consolidated Revenue Fund. A First Nation may The Pilot Project leading up to the opt into either one or both of the parts. new legislation has been There are two sets of regulations needed to championed over the past decade establish rules and procedures for FNOGMMA implementation. Voting regulations relate to by three proponent First Nations, conducting a First Nation membership vote and to White Bear First Nation in Canada's authorization of a First Nation's opting-in to FNOGMMA. Environmental regulations relate to Saskatchewan, and the Siksika conducting environmental assessments on reserve Nation and Blood Tribe in Alberta. lands subject to FNOGMMA.

Indian Oil and Gas Canada2006-2007 Annual Report | 5 Key Initiative Modernization of the Indian Oil and Gas Act

Fiscal year 2006-2007 saw the re-commencement, in partnership with the Indian Resource Council (IRC), of the initiative to modernize theIndian Oil and Gas Act and Regulations. The proposed changes are broad and comprehensive and address the immediate needs of day to day management of First Nation oil and gas resources. Direct consultations with a majority of the oil and gas producing First Nations assisted in the development of proposed amendments. IOGC has re- In August 2006, the IRC and many of its member First Nations, commenced work on the along with representatives of IOGC and INAC, got together to initiative to modernize establish three joint committees to oversee and guide the the Indian Oil and Gas process. A Steering Committee was established to provide overall direction and includes senior level representatives from Act and its associated both First Nations and Canada. Two Joint Technical Regulations. Committees (JTC) were also established and perform very different functions. The JTC #1 is directly involved in the process to draft the changes to theIndian Oil and Gas Act and Regulations. This committee will work within the federal legislative process to receive drafts of the legislation and provide comments. It will also perform this function in the drafting of the regulations. The JTC #2 will mainly operate at the strategic level, looking at options related to transforming IOGC into a First Nations institution, among other things. This committee will also be looking at oil and gas and governance issues that fall outside the scope of the JTC #1, as a basis for a continuous change process to theIndian Oil and Gas Act and Regulations.

Work in the 2006-2007 fiscal year focused on re-acquainting all committee members with the proposed change package and providing input to Canada in the documents that formed the basis for a cabinet submission.

6 | Indian Oil and Gas Canada2006-2007 Annual Report Key Initiative Royalty with Certainty

Background

The Royalty with Certainty project involves exploring options to simplify IOGC's negotiated royalties.

Over the past number of years, IOGC's negotiated royalties reflected First Nations' wishes for more active involvement as the oil and gas business evolved. Consequently, a highly complex system of royalties using a wide variety of defined values came to exist. Some of these defined values are not known at the time royalties are due to be paid, The two main so IOGC began accepting estimated values and payments and purposes of performed recalculations and adjustments in later months once actual values were known. Given that the actual values are often not all simplification are to known at once, there can be several recalculations of royalties and a increase certainty of significant amount of time elapsed from the time the royalties were initially due to when payment is complete and accurate. the value of First Nations royalties and These adjustments result in overpayments and underpayments to the First Nation, increasing the administrative burden for IOGC, First to decrease the Nations and companies. timeframe required to obtain these values. Status The project is comprised of a four phase work plan. The first two phases of the project are completed: publicly available price markers for natural gas and for products that result in no loss of royalties to First Nations have been developed. These price markers are used in most new agreements and also in amendments to existing agreements when the lessee and First Nation are interested.

For phase three, a consultant has completed a study of IOGC's gas cost allowance and has made recommendations for simplifying it. Regarding phase four, a consultant has also completed a study of IOGC's royalty structures and has proposed a standard royalty structure. IOGC will be reviewing the recommendations contained in the studies and deciding on the next step of incorporating the recommendations in future negotiations for new agreements.

Indian Oil and Gas Canada2006-2007 Annual Report | 7 Key Initiative Streamlining the Royalty Process

Background

The main goal of the project to streamline the royalty process is to ensure that the royalties collected on behalf of First Nations are as accurate and timely as is reasonably possible. The project also supports the automatic calculation of interest and involves extensive changes to current royalty processes. It includes taking advantage of the technology available for electronic submission of information User guides and over the Internet. information letters IOGC's royalty processes were reviewed in fiscal year 2003-2004. developed throughout By June 2004, IOGC had developed a new business model with revised business rules, procedures and processes including electronic this initiative are submission. An implementation plan, complete with process training available on IOGC’s documentation and change management considerations, was Web site at developed as of March 2005. www.iogc.gc.ca. Status

IOGC developed a system to receive electronic submissions of royalty data that went live on April 25, 2005. Companies use the system to submit electronic royalty data and copies of backup documentation for pricing and volumes, enabling them to fulfill their data submission requirements via the Internet.

In support of the related key initiative Automation of Interest with Accounts Receivable System, a billing project for calendar years 2004 and 2005 was initiated. The project involves sending billing packages, each based on a company's royalty reporting activities for January 2004 through December 2005 for an individual Indian reserve. Ultimately, a monthly report summarizing royalty activity and any related interest charges will be developed and sent to companies.

Additionally, a Gas Cost Allowance User Guide was published along with four gas cost allowance forms, all available on IOGC's Web site. In the future it is planned that gas cost allowance applications will be able to be sent electronically over the Internet.

Throughout the project, information letters have been distributed to update industry on the changes and on modifications to their reporting requirements. The information letters and an Electronic Submission User Guide are available on IOGC's Web site.

8 | Indian Oil and Gas Canada2006-2007 Annual Report Key Initiative Automation of Interest with Accounts Receivable System

Background

Indian Oil and Gas Canada (IOGC) collects moneys on behalf of First Nations relating to the exploration and production of their oil and gas. Moneys collected fall into the broad categories of land and royalty, with land moneys including things such as bonuses, initial considerations and annual rentals. Royalty moneys are collected on the production of First Nation oil, gas and gas products. The number of late Interest has been collected on late moneys by preparing letters land payments has advising companies of outstanding amounts and interest required been reduced from pursuant to theInterest and Administrative Charges Regulations . 30% to 2% with a IOGC is automating the collection of interest on the late payments of corresponding 45% these First Nation trust funds by implementing an accounts receivable reduction in late system within IOGC's Resource Information Management System (RIMS). Once complete, monthly receivable statements for land and dollar amounts to royalty will be generated automatically and sent to companies. A about 1%. separate statement will also be provided to First Nations. The project is split into two phases, land development and royalty development.

Status

The development of the land statement system was completed and monthly distribution of land statements commenced in May 2006. As a result of the implementation, there has been an increase in compliance with payments generally being made ahead of time. The number of late land payments has been reduced from 30% to 2% with a corresponding 45% reduction in late dollar amounts, which are now approximately 1%. The overall response from companies to this initiative has been positive.

Work has also commenced on the royalty development phase of the project.

Indian Oil and Gas Canada2006-2007 Annual Report | 9 Spotlight: First Nation-owned Oil and Gas Companies

Many First Nations have created their own oil and gas companies as a way to become more involved in the industry and to potentially reap more rewards than by passively First Nations in Alberta collecting royalties. and Saskatchewan own 19 oil and gas At the end of fiscal year 2006-2007, First Nations in Alberta and Saskatchewan owned 19 oil and gas companies with companies with subsurface agreements on Indian reserve lands. Typically, these subsurface agreements First Nation-owned oil and gas companies hold leases on their own First Nation's lands and do not operate, but joint venture on Indian reserve lands. with operating oil and gas companies.

During the year, 53 wells were drilled on the subsurface agreements held by First Nation-owned companies, representing 27 percent of the total wells drilled on all First Nations' reserve lands.

2006-2007 Fiscal Year End Snapshot

Subsurface Agreements Area of Subsurface Agreements (hectares)

184 leases 90,000 ha 561 held by First under leases held agreements Nation owned 378,000 by First Nation held by companies ha under owned companies other agreements companies held by other 33,000 ha companies under permits held 9 permits by First Nation held by First owned companies Nation owned companies

Alberta Sask. Total

Number of First Nation-owned companies 15 4 19 Number of subsurface agreements 130 63 193 Area of subsurface agreements (hectares) 97,000 26,000 123,000

10 | Indian Oil and Gas Canada2006-2007 Annual Report YUKON Yellowknife

Fort Nelson NORTHWEST TERRITORIES

BRITISH NUNAVUT COLUMBIA

ALBERTA SASKATCHEWAN Fort Grande McMurray MANITOBA Prairie Prince George

Thompson

Edmonton

Kamloops Red Deer Prince Albert

Vernon Calgary Kelowna Saskatoon Penticton

Medicine Lethbridge Hat Dauphin Moose Jaw Regina

Legend:

Producing Indian reserve Brandon Winnepeg Indian reserve, not producing National park City UNITED STATES OF AMERICA

Map of Western Canada Sedimentary Basin Showing Indian Reserves Producing Oil and/or Gas

The Western Canada Sedimentary Basin is the most prolific hydrocarbon region of Canada, accounting for the vast majority of crude oil and natural gas. The map shows the approximate boundaries of the Western Canada Sedimentary Basin.

Areas within the Basin have the potential for production. Areas outside the Basin have no potential now or in the foreseeable future.

Indian Oil and Gas Canada2006-2007 Annual Report | 11 Canada`s Seven Hydrocarbon Regions

KALAALLIT (DENM

ALASKA (United States of America)

YUKON TERRITORY

NUNAVUT NORTHWEST TERRITORIES

BRITISH COLUMBIA

ALBERTA MANITOBA

SASKATCHEWAN ONTARIO

Canada`s seven hydrocarbon regions are those areas of Canada that are composed of sedimentary rock, which is the type of rock that can hold oil and natural gas. UNITED STATES OF AMERICA Legend

Pacific Margin T NUNAAT Intermontane MARK) Western Canada Sedimentary Basin Arctic Margin Arctic Cratonic Eastern Cratonic Atlantic Margin Indian Oil and Gas Canada is responsible for managing the oil and gas from surrendered or designated Indian Reserve lands across Canada.

There are about 3000 Indian Reserves in Canada, almost all of which are south of the 60th parallel.

Indian Reserve lands must be “designated” for the development NEWFOUNDLAND AND LABRADOR of oil and gas pursuant to the Indian Act. Currently there are about 300 such designated Indian Reserves spread across British Columbia, Alberta, Saskatchewan, Manitoba and Ontario, with one in the Northwest Territories. QUEBEC

PEI NEW BRUNSWICK

NOVA SCOTIA

Indian Oil and Gas Canada2006-2007 Annual Report | 13 Indian reserve Operations

Indian Oil and Gas Canada has four distinct units that regulate the exploration and development of First Nations oil and gas resources. Executive Unit is accountable for overall agency planning and direction, consultation, policy development, pilot project management, communications and overall executive and legal services. Land Unit issues and administers agreements on First Nations lands. Production Unit monitors production from First Nation lands and ensures the accurate collection of royalties. Planning and Corporate Services Unit is responsible for corporate planning, finance, administration and human resources.

Executive

The Executive Unit, headed by the Chief Executive 7 Liaising between IOGC and the pilot First Officer, focuses on: Nations and with other areas of government 7 Leading of consultation sessions necessary to 7 Setting corporate direction and strategy progress on the initiative 7 Implementation of directives of the IOGC Board of Directors Communications/Executive Services Functions 7 Operational policy development (including legislative/regulatory amendments) and 7 Disseminating information to First Nations, oil consultation and gas industry companies, the public and 7 Communications and corporate executive government services 7 Development of corporate communications 7 Management of the pilot project strategies regarding IOGC issues that have the potential to impact First Nations or the private Operational Policy Group Functions sector 7 Development and preparation of briefings on 7 Support of operational policy development IOGC issues for senior DIAND/IOGC officials 7 Support of new legislation, specifically the and the minister First Nations Oil and Gas and Moneys 7 Preparation of communications plans, Management Act strategies, reports (including the Annual 7 Advancing proposed changes to the Indian Report) and correspondence on IOGC activity Oil and Gas Actand Indian Oil and Gas 7 Maintenance of IOGC's Web site, Regulations, 1995 www.iogc.gc.ca 7 Involving key parties to obtain input in the above During fiscal year 2006-2007, IOGC implemented a Web content management system that allows the Pilot Initiative Group Communications group to update and change IOGC's Web site directly, rather than sending change 7 Management and support of the First requests to IT for completion. Nations Oil and Gas Management Initiative, referred to as the "Pilot Project" The group also developed several publications in support of IOGC's recruitment and retention strategy.

14 | Indian Oil and Gas Canada2006-2007 Annual Report Land

The Land Unit contains three groups: Negotiations and Subsurface Land Contracts and Administration; Environment; and Research and Surface Land.

Bonus Moneys Collected on Negotiations and Subsurface Land Contracts Group Behalf of First Nations ($ millions) Negotiations Functions

7 Identifying, developing and promoting disposition 16 options with First Nations to promote and increase 14 exploration and development of First Nations oil and gas resources 12 7 Assessing proposals by interested companies against 10 8.9 IOGC's disposition policy 7 8 Assisting First Nations in reaching agreements with companies by providing negotiation and facilitation 6 expertise to support the negotiation process 4 7 Providing information concerning subsurface leasing trends, sales prices and related policies to all interested 2 stakeholders 7 Providing advice to Treaty Land Entitlement (TLE) First 02-03 03-04 04-05 05-06 06-07 Nations, and working together with various federal and provincial government departments and industry to facilitate the implementation of the TLE process

In fiscal year 2006-2007, there were 26 negotiated subsurface Compensation and Rental agreements (Permits and Leases) initiated, with an associated Moneys Collected on Behalf of First Nations area of 37,000 hectares. There were also 17 negotiated ($ millions) amendments to existing subsurface agreements initiated during the year. Approximately 20 negotiations were still ongoing at

16 the end of the fiscal year. 14.3 14 The above negotiations resulted in the collection by IOGC of 12 almost $9 million in bonus moneys on behalf of First Nations

10 during the fiscal year.

8 The negotiations staff was also actively involved in IOGC's 6 Royalty with Certainty key initiative, which is tasked with

4 exploring options to simplify IOGC's negotiated royalties. Additionally, the group assisted the FNOGMMA First Nations in 2 their preparation for the potential transfer of oil and gas management and control from IOGC to these First Nations. 02-03 03-04 04-05 05-06 06-07 The group also continues to work on solutions to handle the increasing work load from high volumes of regular operations as well as increasing TLE roles and responsibilities.

Indian Oil and Gas Canada2006-2007 Annual Report | 15 Subsurface Land Contracts and Administration The subsurface Land Contracts and Administration Functions staff continues to be actively involved in two key initiatives, Automation of Interest with Accounts 7 Drafting and ensuring the execution of oil Receivable System, and the implementation of and gas agreements and amendments in FNOGMMA in the form of assisting the FNOGMMA accordance with negotiated terms and First Nations. conditions and with federal government regulations Environment Group Functions 7 Monitoring and verifying contractual commitments 7 Ensuring all proposed oil and gas surface 7 Administering subsurface oil and gas facilities and activities, including seismic and agreements throughout their lives, including construction of surface leases, access roads handling financial commitments (excluding and pipeline rights-of-way, undergo an royalties) and First Nation suspense environmental assessment or screening as accounts required by the Canadian Environmental Assessment Act (CEAA) During fiscal year 2006-2007, the subsurface land 7 Reviewing all environmental assessments to contracts and administration staff handled 17 ensure potential environmental effects are amendments to subsurface agreements and issued mitigated 29 negotiated subsurface agreements. The group 7 Imposing environmental protection terms so also processed 23 lease selections, when grantees that oil and gas companies comply with selected permit areas to convert to leases. A permit federal and provincial legislation gives a grantee the right to explore for but not 7 Performing field inspections and reviewing produce oil and gas, while a lease gives the environmental audits of surface facilities to grantee the right to produce. The group handled monitor industry compliance with the 166 lease continuances (standard leases have environmental terms of surface agreements terms of five years). There were 64 agreements that 7 Providing information and assistance to First expired or otherwise terminated. At year end, staff Nations, industry representatives and other was administering about 750 subsurface stakeholders agreements with an associated total area of 7 Ensuring the adequacy of reclamations prior 500,000 hectares, compared to about 770 to the surrender of surface agreements agreements and 590,000 hectares at the end of the previous year. During fiscal year 2006-2007, environmental staff initiated 240 environmental assessments pursuant to Staff also issued 7 Directions to Comply during the CEAA. Staff also conducted field visits for compliance year. Pursuant to the Indian Oil and Gas and reclamation inspections, as well as pre- Regulations, 1995, IOGC may issue a Direction to construction site visits. Comply when a contract holder has not paid an amount due under the contract, such as rentals, or The environment group updated its procedures: has failed to comply with specific terms in the Reclamation and Surrender of Surface Agreements; contract or with the Indian Oil and Gas and Environmental Audit Requirements. It also Regulations, 1995. Staff also handled 75 developed the Wellsite Reclamation Application Form assignments of contracts from one company to and the Detailed Site Assessment Form. These another, company name changes/amalgamations procedures and forms are available on IOGC's Web affecting 527 agreements and company address site at www.iogc.gc.ca. The CEAA terms letter changes affecting 452 agreements. templates were also revamped and updated.

16 | Indian Oil and Gas Canada2006-2007 Annual Report The unit's next focuses will be to continue to update Research Functions and develop information letters and procedures, and to progress further with wellsite reclamation. 7 Verifying legal title and status of minerals for surrendered and designated Indian reserve IOGC was also fortunate to host the first-ever lands prior to disposition Environmental Stewardship Steering Committee 7 Verifying legal title and acreage leased by all (ESSC) on February 27, 2007. The ESSC is a parties (this may entail review of title for non- committee of Indian and Northern Affairs Canada reserve lands) to determine the First Nation (INAC) with a goal to develop and promote the interest for pooling purposes and to ensure integration of best practices in environmental the production spacing unit is complete management into the planning and decision- 7 Providing mineral title status of Indian reserve making of all sectors' activities occurring on First or former Indian reserve land for the Nations and Inuit lands. Members are from purposes of monitoring activity, land claims, different sectors and regions within INAC. The and litigation ESSC meeting was followed by a two-day Regional Environmental Managers meeting at IOGC offices. During fiscal year 2006-2007, the research staff verified legal title and acreage to determine the First Surface and Research Group Nation interest in 291 well entities, which involves confirming acreage in the spacing units to determine Surface Functions the First Nation interest. In this pooling process, many spacing units are 100% First Nation interest 7 Drafting and ensuring the execution of all while others are partial interest. Where the First surface agreements in accordance with Nation lands are partial interest, they are pooled with negotiated terms and conditions and other lands in the spacing unit based on acreage federal government regulations and a determination is made of the First Nation's 7 Administering all surface agreements share of production from the well, expressed as a throughout the life of the agreement, percentage. including financial commitments, rent reviews, assignments and surrenders 7 Training and working together with First Nations and industry regarding surface dispositions

During the year, the surface staff initiated 271 surface agreements. These included 179 surface leases, generally to drill wells, 80 rights of way to install pipelines and 12 exploratory licences to shoot seismic. At the end of fiscal year 2006-2007, the surface staff was administering 4,009 active and pending surface agreements and 24 exploratory licences, including 2,753 surface leases. This compares to managing 3,797 agreements including 2,556 surface leases at the end of the previous fiscal year.

Indian Oil and Gas Canada2006-2007 Annual Report | 17 Summary of Negotiated Subsurface Permits Initiated during FY 2006-2007*

Area Disposed First Nation Company (Hectares)

Chipewyan Prairie First Nation (AB) Basic Minerals & Land Corp. 1,626.00 Dene Tha' (AB) Set Resources Inc. 5,632.00 Frog Lake (AB) Frog Lake Energy Resources Corp. 2,449.74 Piikani Nation (AB) Norwegian Petroleum Inc. 6,187.52 White Bear (SK) Canadian Eagle Energy Ltd. 10,367.58

Total 26,262.84

Summary of Negotiated Subsurface Leases Initiated during FY 2006-2007

Area Disposed First Nation Company (hectares)

Alexander (AB) Questerre Energy Corporation 719.96 Alexander (AB) Wrangler West Energy Corp. 1,456.08 Big Island Lake Cree Nation (SK) Nuvista Resources Ltd. 280.89 Blood (AB) Bowood Energy Corp. 256.00 Cold Lake First Nations (AB) Tri-Rez Oil & Gas Production Ltd. 128.00 Enoch Cree Nation #440 (AB) Oskya Energy Ltd. 48.00 Frog Lake (AB) Frog Lake Energy Resources Corp. 418.24 Horse Lake First Nation (AB) Tusk Energy Corporation 4.33 Kehewin Cree Nation (AB) Dyno Energy Ltd. 6.60 Kehewin Cree Nation (AB) Kehewin Resources Ltd. 3,440.70 Louis Bull (AB) Canadian Natural Resources Limited 0.42 Louis Bull (AB) Culane Energy Corp. 384.00 O'Chiese (AB) Northrock Resources Ltd. 256.00 Onion Lake (SK) Pearl E&P Canada Ltd. 1,683.93 Paul (AB) Redcliffe Energy Ltd. 256.00 Sunchild First Nation (AB) Conocophillips Canada Resources Corp. 1,274.30

Total 10,613.45

* A total of 4,512.79 hectares of permit lands were converted to 8 leases during fiscal year 2006-2007.

18 | Indian Oil and Gas Canada2006-2007 Annual Report Production

The Production Unit includes three distinct groups: Engineering/Geology, Royalties and Informatics.

Engineering/Geology Group Functions Oil Production from First Nation Lands 7 (Thousand cubic metres) Dealing with volumetric compliance, production monitoring, economic evaluation and reservoir engineering 7 Providing technical evaluation as part of the review and 500 448.4 processing of leases at the end of their primary and 450 succeeding terms

400

350 The Compliance activities include:

300 7 Ensuring that production volumes are measured accurately 250 and reported correctly and inspecting production equipment 200 located on reserves to ensure operation in an 150 environmentally sound manner 100 7 Monitoring the drilling and status of wells around reserves 50 to identify situations where First Nations oil and gas resources are subject to the risk of being drained and taking 02-03 03-04 04-05 05-06 06-07 appropriate measures to lessen the risk of drainage 7 Ensuring that all necessary documents required by the Indian Oil and Gas Regulations, 1995 and which pertain to drilling, servicing and abandoning wells in which a First Gas Sales Volumes from Nation has a royalty interest, are provided by permittees First Nation Lands and lessees (Million cubic metres) 7 Reviewing technical applications of various kinds which companies submit to the provincial regulatory authorities and which could potentially impact First Nations reserve 2500 lands

2000 During fiscal year 2006-2007, IOGC received 43 Notices of 1,601 Application from the Alberta Energy and Utilities Board regarding 1500 drilling and operations. 14 of these applications pertained to areas on Indian interest lands and were reviewed by technical staff. 1000 During the fiscal year, there were also 200 wells drilled affecting 25

500 Indian Reserves in Alberta and six in Saskatchewan. The wells included 102 oil, 70 gas, 9 abandoned and 19 cased. Many of the cased wells will be declared as either oil, gas or abandoned in 02-03 03-04 04-05 05-06 06-07 subsequent months. In drilling these wells, the oil and gas industry invested $99.2 million and drilled a total of 200 kilometres of hole.

Indian Oil and Gas Canada2006-2007 Annual Report | 19 The Reservoir Engineering activities include: applications and approving allowance values to be deducted from royalties 7 Providing yearly revenue forecasts to First 7 Pursuing resolution of royalty overpayments or Nations and the regional offices for budgeting underpayments in a timely manner purposes 7 Conducting field and facility inspections and 7 Evaluating oil and gas leases for continuance examinations as required to ensure claim costs or 7 Processing applications to abandon wells and to deductions are accurate and fall within convert wells for water disposal, fluid injection or prescribed regulations and guidelines use as observation wells 7 Identifying companies that need to be examined 7 Providing advice to First Nations with respect to in the areas of pricing and gas cost allowance the economics presented by companies in 7 Familiarizing First Nations with royalty processes, support of their proposals for developing First including assisting in training of Pilot First Nations lands Nations in monitoring royalties and developing 7 Estimating the recoverable volumes of oil and management reports gas under Indian Reserves and maintaining 7 Training of company personnel in accurate current records of this information (known as the royalty reporting hydrocarbon resource inventory) During fiscal year 2006-2007, royalty staff managed A total of 159 lease continuance applications were over 3000 royalty entities monthly and 500 gas cost handled during fiscal year 2006-2007. About 58,000 allowance applications yearly. hectares of land under these leases were continued while about 20,000 hectares were terminated. The terminated Also during the fiscal year, there were 11 examinations lands are available for re-lease. on 12 Indian reserves completed and/or closed. $1.5 million was collected based on 14 examinations During the fiscal year there were also 14 well affecting seven Indian reserves and seven companies. Of abandonment approvals affecting 8 Indian Reserves. the 14 examinations with collections, seven dealt with One geological and engineering study, for Cold Lake gas and/or product pricing, three with gas cost First Nation lands, was completed under contract during allowance, and four with oil pricing. the year. Recoverable volume figures were updated in- house for several additional Indian reserves. Informatics Group Functions

Royalty Group Functions 7 Maintenance of the local area network and corporate data systems used by IOGC 7 Ensuring the accurate collection of royalties and 7 Provision of support for corporate software subsequent reconciliation of accounts including finance, word processing, spreadsheet 7 Reporting results of reconciliation process to First and graphics-based programs Nations and companies to resolve variances 7 Monitoring royalties collection for Treaty Land Royalty Revenues from Entitlement lands in Saskatchewan First Nation Lands ($ Millions) 7 Ensuring all interest is accounted for from wells

on production on Indian lands 250 7 Verification of reported data to ensure accuracy and completeness 200 7 Ensuring monthly electronic submissions of royalty statements and supporting documents 150 Oil, 33.4 from companies 7 Performing assessments of monthly royalties due 100 within defined timelines 7 Ensuring receipt of annual gas cost allowance 50 Gas, 133.0

02-03 03-04 04-05 05-06 06-07 20 | Indian Oil and Gas Canada2006-2007 Annual Report More about gas royalties

Royalties are calculated based on several factors, including the price, the production volume and the royalty structure. For most gas royalty volumes, price is the actual sales price, but some leases specify the use of a published index price. Natural gas prices are based on marketplace supply and demand.

The average royalty price for First Nations gas in 2006-2007 was $246 per thousand cubic metres, a 23% decrease from the previous year's average of $321 per thousand cubic metres, but still higher than the 2004-2005 average of $233 per thousand cubic metres. The 23% decrease is comparable to the 25% drop experienced in the Alberta Gas Reference Price and to the 28% drop experienced in the average gas spot price over the same period.

The fall in gas prices over the last year was due to lessened demand as a result of a warmer winter and increased supply in the form of high gas volumes available in storage at the beginning of the peak winter demand season plus resumption of supply as repairs were made in the Gulf of Mexico to damages caused by Hurricane Katrina in 2005.

Gas production from First Nation lands also decreased over the last year, from 1,996 to 1,601 million cubic metres in fiscal years 2005-2006 and 2006-2007 respectively, a drop of 20%. The decrease is mainly a natural market consequence of a combination of relatively lower gas prices and high drilling costs resulting in operators drilling fewer gas wells than in the previous few years. The high drilling costs were caused by high energy costs of the previous year and a continuing tight labour market. Additionally, new gas wells on average become smaller every year as the Western Canada Sedimentary Basin matures. Many new wells have low productivity and short lives.

Another key factor affecting First Nation royalties is the royalty structure and the resulting calculated royalty rates. Indian Oil and Gas Canada uses a variety of royalty structures, ranging from the royalty structure prescribed in the Indian Oil and Gas Regulations, 1995 at a few aging leases, to other royalty structures such as ones based on provincial Crown royalties. The royalty structure prescribed in theIndian Oil and Gas Regulations, 1995 was created in the 1970s and has very high royalty rates. It is not competitive with current provincial royalty structures and has not been for some time. Consequently, for the past decade and more, IOGC has issued virtually all agreements with lower and more competitive royalty structures. As the wells on older leases using the high Regulation royalty rates continue to experience natural declines in productivity over time, so the average overall royalty rate decreases. Additionally, oftentimes the royalty structures are price and/or production sensitive and can magnify the effect of price and production fluctuations.

Average Natural Gas Prices

350

300 First Nation gas price

250 Spot gas price $/1033 m 200 Alberta Gas Reference Price

150

100 02-03 03-04 04-05 05-06 06-07

Indian Oil and Gas Canada2006-2007 Annual Report | 21 First Nation Interest Wells Drilled from April 2006 through March 2007*

Number of Wells Drilled Reserve Oil Gas Cased D&A* Total Alexander #134, AB 13004 Alexander Fox Creek #134A, AB 01001 Alexis Whitecourt #232, AB 01001 Beaver Lake #131, AB 01001 Blood #148, AB 20316 Buck Lake #133C, AB 10001 Carry the Kettle #76-33, SK 0 31 0 0 31 Cold Lake #149, AB 50005 Hay Lake #209, AB 10102 Horse Lakes #152B, AB 00011 Little Pine #116, SK 20013 Loon Lake #235, AB 20226 O'Chiese #203, AB 0 12 5 1 18 Onion Lake #119-1, SK 17 3 0 0 20 Pigeon Lake #138A, AB 01102 Poundmaker #114, SK 10001 Poundmaker #114-22, SK 20002 Puskiakiwenin #122, AB 25 0 1 0 26 Samson #137, AB 01012 Seekaskootch #119, SK 11 1 0 0 12 Siksika #146, AB 07007 Stoney #142,143,144, AB 01001 Stony Plain #135, AB 21508 Sunchild #202, AB 02002 Swampy Lake #236, AB 30003 Tsuu T'ina #145, AB 02013 Unipouheos #121, AB 16 0 0 1 17 Utikoomak #155, AB 10001 Wabamun #133A, AB 02002 Wabasca #166, AB 10 0 0 0 10 Wabasca #166D, AB 00101 Total 102 70 19 9 200 * Dry and Abandoned

Wells Drilled on First Nation Lands Indian Reserves with Oil and/or Gas Production During FY 2006-2007

250 Number of Treaty Indian Province Area Reserves 200 Dry/other, 9 Cased, 19 Alberta 6 23 76 150 Gas, 70 816

100 British Columbia 8 3

Saskatchewan 2 2 50 Oil, 102 41 615

02-03 03-04 04-05 05-06 06-07 Total 66

22 | Indian Oil and Gas Canada2006-2007 Annual Report Planning and Corporate Services

Planning and Corporate Services (PCS) is headed by the Director, Planning and Corporate Services. PCS's key responsibilities include provision of essential corporate services that relate to administrative policy, human resources, finance, contracts and administration. The unit also manages and coordinates planning for the organization resulting in a Management Plan and acts as secretariat to support IOGC Co- management Board operations.

Human Resources Group Functions

7 Administering human resource items related to IOGC's Separate Employer status 7 Recruitment and staffing 7 Staff relations 7 Compensation and benefits 7 Training and career development 7 Classification

Total Moneys Collected on Behalf of First Nations During the fiscal year, three policies pursuant to the Public ($ millions) Service Employment Act were developed and approved: Learning, Training & Deployment, Pre-retirement Transition and Notification. Training for managers on resolution and 300 prevention of harassment in the workplace was conducted; there will be future information sessions on the same subject for 250 employees. Extensive work was done on developing and implementing the new recruitment and retention strategy. 200 189.5 At year end IOGC had 71 staff on strength with a full-time 150 complement of 77. 43 percent of employees were of Aboriginal

100 descent.

50 Contracts and Administration Group Functions

7 Contract administration 02-03 03-04 04-05 05-06 06-07 7 Maintenance of central records 7 Facility management 7 Purchasing 7 Security 7 Handling of access to information requests 7 Maintenance of a resource library

During fiscal year 2006-2007, IOGC entered into procurements for a total of $2.1 million for a variety of services and purchases to support required oil and gas operations.

Indian Oil and Gas Canada2006-2007 Annual Report | 23 Finance Group Functions

7 Providing corporate financial service to During the fiscal year, $189.5 million was collected IOGC in the areas of accounting for First Nations and $6.1 million for the Province operations, financial systems, budget of Saskatchewan pursuant to article 5.08 of the allocation, management variance reporting Saskatchewan Treaty Land Entitlement Framework and funding to pilot First Nations for oil and Agreement. gas initiatives 7 Administering the decentralized IOGC Extensive work was done on the key initiative budget Automation of Interest with Accounts Receivable 7 Collecting and processing bonus, lease and System. royalty payments to First Nations trust accounts through IOGC's Resource Information Management System (RIMS) into the department's Trust Fund Management System.

Effects of the Tight Labour Market

The high activity in the oil and gas industry has resulted in an increasingly tight labour market in Alberta. Many companies, especially those in the oil and gas sector, have combated the increasing shortage of skilled workers with increased wages, benefits and perquisites to attract workers from other companies, other sectors and other provinces and countries.

Indian Oil and Gas Canada has not been immune to this environment and faced significant challenges in recruiting technical and professional staff to fill vacant positions, especially engineers, landmen/negotiators, contracts analysts and environmental specialists. These positions continue to be in high demand and are expected to remain so in the foreseeable future.

Indian Oil and Gas Canada continues to address these labour market challenges through development and implementation of new recruitment and retention practices. IOGC has broadened its area of competition nationally for intermediate and senior levels, is seeking to recruit new graduates and work with them to develop their skills, and is pursuing new ways to retain staff once they join IOGC. IOGC is also continuing to pursue new ways of doing business to be more effective and to help address workload and labour challenges.

24 | Indian Oil and Gas Canada2006-2007 Annual Report Financial Operations 2006-2007

Funding - Expenses, Contributions & Transfers $10,418,448

Expenses

Salaries $5,126,275 Operations & Maintenance Inventory Management 140,005 Environment 32,200 Negotiations (Disposition & Amendment) 57,060 Agreement Management 59,997 Royalty 929,806 Compliance 728,665 Corporate Management 698,769 Informatics 198,467 Direct Operations Support 418,456 Policy Management 114,223 Legislative/Regulatory 0 Litigation 160 IOGC Board 2,478 Total Operations & Maintenance $3,380,287

Contributions & Transfers

IRC Partnership 300,000 IOGC Board 92,000 First Nations Oil & Gas Management Initiative 937,000 Other Contributions & Transfers 384,000 Total Contributions & Transfers $1,713,000

Total Expenses, Contributions & Transfers $10,219,562

Surplus/Deficit $198,886

Revenues Collected on Behalf of First Nations

Royalties $166,310,630 Bonus $8,924,166 Compensation and Rentals $14,274,555

Total Revenues Collected on Behalf of First Nations $189,509,351 Indian Oil and Gas Canada Suite 100, 9911 Chiila Boulevard, Tsuu T’ina, AB T2W 6H6 Tel: 403-292-5625 Fax: 403-292-5618 www.iogc.gc.ca